SIE Customer Accounts, Suitability & Investment Risks

Joint Tenants With Rights of Survivorship (JTWROS)

Joint account where owners have equal, undivided ownership interests. | | When one owner dies, their interest automatically passes to surviving owner(s). | | Avoids probate for that interest. | | REMEMBER: Survivorship = Survivor gets it.

Tenants in Common (TIC)

Joint account where owners may have UNEQUAL ownership percentages. | | When an owner dies, their share passes to their estate, NOT automatically to the other owners. | | No automatic right of survivorship.

Transfer on Death (TOD)

Account registration naming beneficiaries who receive assets when the owner dies. | | • Owner maintains control while alive | • Assets generally transfer outside probate | • Beneficiaries do not control the account during owner's lifetime

Discretionary vs. Nondiscretionary Accounts

DISCRETIONARY: Representative may choose the security, amount or whether to buy/sell without prior approval for each trade; requires written customer authorization and firm acceptance. | | NONDISCRETIONARY: Customer approves trades. | | Time-and-price discretion alone generally does not make an account discretionary.

Customer Investment Objectives

CAPITAL PRESERVATION: Protect principal. | INCOME: Generate regular payments. | GROWTH: Increase value over time. | SPECULATION: Seek high returns with high risk. | | Recommendations should match the customer's profile.

Risk Tolerance vs. Time Horizon

RISK TOLERANCE: Amount of investment loss or volatility a customer is willing and able to accept. | | TIME HORIZON: Length of time before customer needs the invested money. | | Short horizons often call for less volatility.

Regulation Best Interest (Reg BI)

When recommending securities transactions or investment strategies to retail customers, broker-dealers and associated persons must act in the customer's best interest. | | Cannot place their financial interests ahead of the customer's. | | Includes disclosure, care, conflict-of-interest and compliance obligations.

Know Your Customer (KYC)

Firms must use reasonable diligence to know essential facts about customers. | | Examples: | • Financial situation | • Investment objectives | • Risk tolerance | • Investment experience | • Authority of people acting on account

Systematic vs. Unsystematic Risk

SYSTEMATIC: Market-wide risk; cannot be eliminated through diversification. | | UNSYSTEMATIC: Company- or industry-specific risk; can be reduced through diversification. | | REMEMBER: Diversification reduces unsystematic risk.

Interest-Rate Risk

Risk that changes in market interest rates affect a bond's market value. | | Rates UP → Bond prices DOWN. | | Longer maturities and lower coupons generally increase interest-rate sensitivity.

Credit (Default) Risk

Risk that an issuer fails to make required interest or principal payments. | | Lower credit ratings generally indicate greater default risk. | | U.S. Treasury securities have very low default risk but still carry other risks.

Inflation (Purchasing Power) Risk

Risk that rising prices reduce the purchasing power of money and investment returns. | | Fixed payments become worth less in real terms when inflation rises. | | TIPS can help protect against unexpected inflation.

Reinvestment Risk

Risk that income or returned principal must be reinvested at lower interest rates. | | Especially important with CALLABLE bonds when interest rates fall. | | REMEMBER: Called bond → Need to reinvest.

Liquidity Risk

Risk that an investment cannot be sold quickly at a reasonable price. | | Examples: Thinly traded securities, certain limited partnerships and nontraded investments. | | Illiquid investments may require selling at a significant discount.

Concentration vs. Diversification

CONCENTRATION: Too much money invested in one company, industry or asset type; increases exposure to specific risks. | | DIVERSIFICATION: Spreading investments across different holdings to reduce unsystematic risk. | | Does NOT eliminate overall market risk.